BAML: The Fed's views on inflation are 'stale'

On Wednesday, the Federal Reserve's policy setting committee reduced its forecast for inflation, with core personal consumption expenditure (PCE) inflation now expected in a range of 1.4% to 1.7% for the rest of this year, down from 1.5% to 1.7% in the December forecast.

"Inflation is expected to remain low in the near term... but to rise to 2% over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further," the committee wrote in their statement.

However, inflation is now at a post-financial-crisis high. On Wednesday (ahead of the end of the Fed's meeting), the consumer price index (CPI) for February showed that "core" inflation, stripped of volatile food and energy costs, rose 2.3% year-over-year.

And while a big drop in the energy index (-6%) pulled down the overall basket of consumer prices, increases in housing, apparel, and medical care costs boosted it.

As such, Bank of America Merrill Lynch's Ethan S. Harris suggested that the Fed's view here might be a bit out of touch.

"We think the Fed's views are stale in several respects," he wrote in a note to clients. "We also argue that the FOMC is more willing to allow inflation to overshoot the 2% target than they are suggesting. Looking ahead, we think this meeting outcome will be the highpoint for Fed dovishness this year and we reiterate our long-standing call for hikes in June and December."

Harris included in his note a chart showing PCE inflation and core PCE inflation. In both cases one can see a noticeable uptick.